Netflix Stock Slammed on Subscription Slide

by Jeff Reeves | September 15, 2011 9:37 am

Netflix (NASDAQ:NFLX[1]) is getting hammered today after announcing its dual-pricing model has scared off more customers than expected. Netflix announced a pricing plan[2] back in July that, starting this month, it would begin charging customers separately for the DVDs it mails out and the streaming video service it provides. Instead of $9.99 for both, NFLX would charge $7.99 for each service.

Netflix had estimated it would wind up with about 3 million DVD-only subscribers and 10 million streaming-only subs. But the real numbers are smaller — much smaller — and that could really mess up any Netflix plans to improve its video library.

The company announced it now tallied 2.2 million DVD-only customers in the U.S., a dramatic 26% shortfall. The streaming video numbers also missed the mark, with only 9.8 million down from a 10 million projection. That’s a 1 million loss to the total headcount of viewers. The dual audience that stuck with both DVD and streaming together was right on target, however, at 12 million.

So what’s the big deal? Most people know that streaming video is the way of the future, right?

True. But that’s the trouble.

Netflix made this move to generate cash for a better catalog of TV shows and movies for its streaming video audience. The costs for rights to new releases and quality content in this format are astronomical, and Netflix has been facing criticism for a while that its library is too stale and too boring for some. The vast majority of Netflix titles are consumed via streaming video, and by charging separately for streaming, the company had hoped to more closely align what it charges folks and what it has to pay studios for the titles.

But apparently, customers are reluctant to embrace this model. People who are fanatics about the streaming service could have gotten a price reduction by eliminating DVDs via the mail and in effect lowering their monthly bill from $9.99 to $7.99. But the fact that a greater-than-expected group jumped ship shows a big flaw in Netflix’s logic.

No wonder the stock is tanking, and competitors like Amazon (NASDAQ:AMZN[4]) and Apple (NASDAQ:AAPL[5]), who have been beefing up their own streaming video services[6], smell blood in the water.

And no wonder Netflix investors are running for cover.

So what’s next for streaming video fans who use the iconic company to consume their favorite reruns or older movies? Probably not much. Netflix has the scale and brand recognition to maintain a foothold as the dominant provider of movies and TV shows that are a few years old.

If you’re a big fan of new releases and the latest cable TV sitcoms, however, you could be in for more disappointment as content providers tighten the noose on Netflix and let-down subscribers head for the hills.

Editor’s note: The story has been updated to reflect the number of NFLX subscribers who both receive DVDs and pay for streaming service.

Jeff Reeves[7]is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.